Contract Exclusions: Everything You Need to Know

Contract exclusions are specific conditions, situations, and circumstances that may or may not be explained in the terms of the contract.3 min read

Contract exclusions are specific conditions, situations, and circumstances that may or may not be explained in the terms of the contract. Both insurance policies and construction contracts tend to contain exclusions.

In monetary terms, an exclusion could be an asset or a source of income that one does not have to compute as gross income.

Where Are Exclusion Clauses Found?

An exclusion clause can be found in a contract. It is sometimes used as a term in a notice. When it is used in either of these documents, it will prevent or limit a liability or legal obligation in certain circumstances that may surface. The exact exclusion needs to be extensively detailed so the parties involved can understand how it impacts them.

What Is the Purpose of Contract Exclusions?

Exclusions are terms within the contract that intentionally limit or eliminate altogether the degree of coverage provided by the agreement.

In the event that a contract is breached, an exclusion clause may not always exclude parties from all responsibility, but it will help to protect them in specific situations as set forth in the agreement.

Most products have an exclusion or limitation clause when stating the terms and conditions for using the product. It will normally state that the company is not responsible for the use of their product if the product is used in ways it was not intended to be used.

How Should Contract Exclusions Be Conveyed?

In order for an exclusion clause to carry out its purpose, it must be clear and practical. Total exclusion clauses are more difficult to enforce, and if not written correctly, courts will not enforce them.

A limitation clause, or a limited liability clause, is much more likely to be enforced in court if it is accurately put forth in the written agreement. In the event of a lawsuit or claim, the clause will limit the amount of damages to which a company can be subjected to.

One example of a liability clause would be a statement in a contract that specifies the company will be liable to pay up to a specific amount of money in the event of an injury. The clause would limit the amount of liability damages, and it can place liability on the other party as well.

What Are Indemnity Clauses?

Indemnity clauses are somewhat complex due to the complex language in them. The purpose of the indemnity clause is to transfer risk between two parties to prevent or compensate for the loss in specified circumstances. Unlike exclusion clauses, an indemnity clause allows a party to protect and defend the other party in the case of a lawsuit.

For example, let's pretend company A develops and sells a product to company B. In time, company C comes along and says company B copied their product. Company A would then be liable for any fees, damages, or court costs if an indemnity clause was included in the original contract between company A and B.

What Are Different Types of Contract Exclusion Clauses?

The term catastrophic refers to risk, such as war, that are uninsurable due to the fact that a large number of policyholders would be affected at a particular time if the risk were to occur. If you want to be covered in this type of instance, you will need a contract that provides catastrophic coverage.

It is not uncommon for policies to exclude certain risks that are covered elsewhere. One example of this would be auto liability claims. Such claims are covered by commercial auto policies, so they are excluded under general liability policies.

Damages that can be easily prevented or easily controlled are often excluded from coverage. These are considered to be preventable and controllable by the policyholder. For example, commercial property policies often exclude such damages that are a result of the following:

Snow,

Rain,

Sleet,

Ice.

Wear and tear is a naturally occurring event and is considered a maintenance issue. Damages from wear and tear are excluded in the majority of insurance policies. In most instances, proper maintenance can reduce the risk of damages. For example, if the owner of a vehicle rotates the tires as recommended, it will reduce the wear and tear and extend the life of the tire. Maintenance issues are another common exclusion in insurance policies.

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